Taking a position that offsets an existing exposure, so that a loss on one is matched by a gain on the other. A hedge usually leaves some basis risk.
Where you will meet it
Hedging comes up in 37 learning outcome notes across the FRM syllabus.
A few of them:
Banks FRM Part I · Financial markets and products
“The trading book holds positions taken for market making, short-term profit or hedging other trading positions.”
The Building Blocks of Risk Management FRM Part I · Foundations of risk management
“Its aim is not to eliminate risk, since that would eliminate return, and hedging usually transforms a risk into a smaller or different one.”
Calculating and Applying VaR FRM Part I · Valuation and risk models
“Correlation breakdown means that the correlations estimated in normal markets are not stable: in a crisis, correlations between risky assets tend to rise sharply toward one, and some hedging relationships fail altogether.”
Fundamentals of Credit Risk FRM Part II · Credit risk measurement and management
“A beneficiary of a guarantee, credit insurance or a credit default swap is exposed to the guarantor or protection seller, so hedging replaces one credit risk with another.”
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